CASA webinar 7: Five routes to profitable sourcing from smallholder farmers: investor perspectives on the ‘deal’

CASA webinar 7: Five routes to profitable sourcing from smallholder farmers: investor perspectives on the ‘deal’

26 May 2021. CASA webinar 7: Five routes to profitable sourcing from smallholder farmers: investor perspectives on the ‘deal’.

There are 500 million smallholder farmers worldwide. These farmers represent both a key supplier base and a market for firms. But how do investors perceive the smallholder-sourcing business ‘deal’?

This CASA Breakthrough Webinar built on the recent publication by the CASA Technical Assistance Facility which maps the landscape of investment in smallholder sourcing models. It will set out the current percentage of funding allocated, by investors, to smallholder sourcing. It will explore the perspectives of investors on the commercial viability and development impact of these sourcing models. It will also share case studies that show what investors have been able to achieve.

Experiences of delivering or facilitating commercially viable investments sourcing from small-scale producers:

  • Marcel Neutel, from Capital 4 Development Partners (C4D)
    Marcel explained the opportunities for investors from sourcing from small-scale farmers. He shared some of the constraints that CDC has faced & how this experience influenced their investment strategy.
  • Edward Stiles from Maris Ltd
    Edwards explored the incentives that are required to drive investment in more smallholder sourcing businesses and the tools that are needed to support this approach. 
  • Cara Middleton from the IDH Farmfit Fund
    Cara set out the levers can drive commercial viability and impact. She also explained how is Farmfit is structured to address the constraints often experienced in sourcing from small-scale producers. These including upfront analysis and the use of blended finance.

Publication:

  1. This study seeks to add to the body of knowledge on the commercial and development impact potential of smallholder-sourcing agribusiness models by: quantifying the share of investment flowing specifically to agribusinesses sourcing from smallholder farmers within the broader category of agriculture; and capturing investor perspectives on the commercial viability and development impact of companies that source from smallholder farmers. 
  2. Based on the findings, five specific opportunities are identified for investors, agribusinesses and development partners to support investment in smallholder-sourcing models. 
  3. It is suggested that unlocking the opportunities of smallholder sourcing requires acknowledging and addressing the constraints in investing in smallholder-sourcing agribusinesses and the challenges in sourcing from smallholders. 

Investors need a critical mass of clear examples of profitable, inclusive sourcing models to ensure that there exists a path to scale that would provide an exit opportunity. Tools such as pre-investment technical assistance and blended finance can go beyond typical due diligence tools, such as feasibility studies, to actively build the pipeline of investment-ready businesses and to support sustainable growth of investee companies.

Five opportunities for investors

  1. Investors should map the investment gap through systematic classification and tracking of smallholder-sourcing agribusinesses to provide greater clarity on this ‘asset class’. This can improve guidelines on the blend of capital and Technical Assistance (TA) required to boost effectiveness. 
  2. Agribusinesses should invest in thorough upfront analyses, including supply chain, context and end-market analysis, before implementing a smallholder sourcing model. In-depth analyses (ideally pre-investment or early investment stage) can help manage the complexities of sourcing models, pinpoint where private capital should be deployed when commercial gains are evident and target public funding where it is needed. Existing examples of this type of analysis include TechnoServe’s Inclusive Business Plans which are carried out prior to advising on and implementing TA and IDH’s work on Service Delivery Models. 
  3. There is a continued role and need for partnerships between investors, donors and agribusinesses to support provision of critical upstream support services to smallholder suppliers, where inclusive TA has the potential to sustainably improve smallholder sourcing operations and de-risk investments. Investors need a critical mass of profitable, inclusive sourcing examples to ensure that there exists a path to scale and exit. Similarly, public funders want to see evidence of meaningful development impact to support further funding of private sector initiatives. Routine TA provision and impact monitoring can help to build the pipeline of scalable smallholder sourcing businesses. 
  4. Investors should consider establishing agricultural investment vehicles with longer investment horizons than the typical Venture Capital or Private Equity timeframes. An example of such a structure is a Permanent Capital Vehicle (PCV) which has no set time for exiting an investment. PCVs provide the time and flexibility for investments to generate returns at their own rate which can be an agronomic necessity. 
  5. Agribusinesses and investors should leverage monitoring and impact measurement to improve business operations and integrate impact data into existing management systems. Impact measurement can assist in streamlining processes and leveraging digital technologies can enable data-driven decision making. This type of monitoring can also direct TA efforts and inform the set-up of future smallholder sourcing schemes.
Related:  
Watch the April webinar on-line or download the 1-page summary and learn how to explore the reality on the ground after a year of COVID-19.

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